Huge losses, modest gains: how should school endowments respond?

REC recently began a substantial research project into the practice of responsible investment in universities. Already a few interesting numbers are surfacing.

While it is no secret that universities lost substantial amounts during the recent financial crisis, it appears that by 2009 endowments had shrunk on average by 26% from their 2007 peak. While some bounce-back occurred in 2010, endowments are still down on average about 20% on their 2007 levels. This equates to losses of tens of millions of dollars for typical endowments, a number which increases to upwards of ten billion for the largest ones. So, how should schools respond to these figures?

One possibility is to simply redouble their efforts doing the same things as they did before. Schools have a lot of ground to make up, and the habits of their investment managers, which have been ingrained over many years of training and practice, must be hard to shake. But, of course, it was arguably those habits, and the logic that informed them, that resulted in such unsustainable investments being made in the first place. From REC’s point of view, this is a concerning possibility as it may make schools less sensitive to the merits of responsible investing.

Alternatively, schools could allow this experience to prompt a radical rethink of investment practices. On the one hand, by investigating the social and environmental impact of specific investments, ethical considerations can become part of investment decision-making. But beyond this, schools will develop a greater pool of knowledge about the investments they are making, allowing a more informed and thus more accurate assessment of the risk to which they are exposed. Had schools traced their investments through to the unsustainable lending practices prevalent in the mortgage sector leading up to 2007, they could have been better placed to protect themselves when the house of cards finally tumbled.

REC’s research project is still in its early stages, and hopefully will yield some more profound insights as it progresses. Nevertheless, it is important to consider how the endowment losses it shows schools to have experienced could produce two quite opposing reactions. This provides an indication of the situation with which REC is faced. We must work hard to elevate the advantages of the latter interpretation of these losses above the temptation to pursue the former one.